VZCZCXRO7954
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #4077/01 3661411
ZNR UUUUU ZZH
P 311411Z DEC 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 1079
INFO RUCNRAQ/IRAQ COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 BAGHDAD 004077 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV EFIN IZ
SUBJECT: REVISED 2009 BUDGET ENDORSED BY COUNCIL OF 
MINISTERS: REALITY OF LOWER OIL PRICES BITES 
 
SENSITIVE- PLEASE HANDLE ACCORDINGLY 
 
¶1. (SBU) Summary and Comment:  A further revised proposed GOI 
budget for 2009 endorsed by the Council of Ministers on 
December 23, reflects the reality of lower oil prices. 
Revenues are projected to be USD 42.5 billion based on 
exports of 2 mbpd at USD 50 per barrel, expenditures planned 
to be USD 59.5, leaving a deficit of USD 17 billion.  The 
budget will be submitted to the Council of Representatives 
for consideration when it reconvenes January 10. 
¶2. (SBU) Total expenditures in this latest version of the 
proposed 2009 budget are lower than the USD 79.8 billion 
initially agreed by the Council of Ministers and lower even 
than the USD 67 billion in the IMF-agreed revised budget 
submitted to the Council of Representatives as the price 
assumed for oil slid from USD 80 per barrel to USD 62.50 to 
USD 50. 
¶3. (SBU) The Finance Minister's budget transmittal message 
indicates that security is the top priority but it is to be 
balanced with capacity building in the government and capital 
investment in critical areas such as oil, electricity and 
infrastructure.  He urges more attention to  efficient 
implementation of investment projects, recognizes the need 
for foreign investment to help develop Iraqi oil production, 
and expresses the intention to broaden the revenue base and 
promote the private sector. 
¶4. (SBU) Tracking this proposed budget in the Council of 
Representatives should prove interesting as there are likely 
to be many contentious points, such as revenue distribution, 
allocations to provinces, and the oil price/export 
assumptions.  From a broader perspective, the current 2009 
proposed budget is not out of line with the initial 2008 
budget, before higher oil prices provoked a supplemental 
budget which, in the end, was not fully executed and did not 
lead to a sustainable budget path.  A tighter budget adds to 
the pressure on the GOI to pursue greater efficiencies in 
government programs, reduce waste, and put greater attention 
on ways to encourage foreign investment to help GOI achieve 
its reconstruction and development goals.  The Minister's 
budget message echoes these goals, but without commitment and 
dedication by all GOI Ministries and provincial authorities, 
it is the sound of one hand clapping.  End Summary and 
Comment. 
Headline Figures:  Popping the Oil Price Bubble 
--------------------------------------------- -- 
¶5. (SBU) The Iraq budget proposal for 2009 that was submitted 
to the Council of Representatives in November after 
consultations with the IMF was withdrawn by the GOI earlier 
this month.  With further sharp declines in oil prices since 
the summer, that budget looked increasingly unrealistic. 
After reworking the proposal, and with the advice of the High 
Economic Council, the Ministry of Finance submitted a revised 
proposed budget to the Council of Ministers, which was 
endorsed on December 23, 2008.  The Ministry will submit this 
new proposed budget to the Council of Representatives for 
consideration when it reconvenes on January 10. 
 
¶6. (SBU) The new revised proposal forecasts revenues of USD 
42.5 billion and expenditures of USD 59.5 billion, 
establishing a budget deficit of USD 17 billion.  It is based 
on an average oil price of USD 50 per barrel and average 
exports of 2 million barrels per day.  This latest draft 
proposal follows previous 2009 versions with expenditures of 
USD 79.7 billion and USD 67 billion based on oil prices at 
USD 80 and USD 62.50 per barrel, respectively.  See tables at 
QUSD 80 and USD 62.50 per barrel, respectively.  See tables at 
the end of this message. 
 
General Principles: Security First but Striking a Balance 
--------------------------------------------- ------ 
¶7. (SBU) The introductory section of the Finance Minister's 
transmittal message presents general foundations and 
principles upon which the proposed 2009 budget was prepared. 
Generally, priority was given to security and supporting 
national reconciliation and improved operation of the 
ministries (capacity building to deliver services, prepare 
budgets, and improve operations and budget implementation). 
More specifically, the budget seeks to improve capacity in 
the areas of security, national defense, oil sector, 
electrical power, services, basic infrastructure, 
unemployment, and human rights.  In doing so the budget aims 
to achieve a balance between operating and capital 
expenditures.   Capital expenditures sustained at 2008 base 
levels will help with reconstruction and infrastructure 
projects which can help attract investment and promote job 
creation, according to the Minister's message. 
 
Revenues:  Slick Oil Assumptions 
-------------------------------- 
¶8. (SBU) Oil revenues are budgeted to account for 86 percent 
of total revenues.  The budget assumes an average oil price 
 
BAGHDAD 00004077  002 OF 004 
 
 
of USD 50 per barrel with sales averaging two million barrels 
a day.  Finance Minister Jabr acknowledges that, with current 
oil prices in the high -USD 30,s, this may seem optimistic. 
He has seen some forecasts of prices in the high USD 40s, but 
also admits that he has seen forecasts in the USD 20,s. 
 
Oil: The Need for More 
---------------------- 
¶9. (SBU) The Minister's budget transmittal message recognizes 
that the GOI will remain dependent on oil revenue to finance 
investment projects.  Accordingly, he suggests that the 
production and export of oil be increased through: (a) 
continuing budget allocations for oil sector investment; (b) 
accelerating project implementation; and (c) ratifying the 
legal framework to open the way for foreign investment. 
 
Non-Oil Revenue: Great Expectations 
----------------------------------- 
¶10. (SBU) Revenue from non-oil sources is projected to be USD 
6 billion, a rather large leap from the USD 2.6 billion 
collected in 2007.  The Minister's budget message, noting the 
need to expand the revenue base beyond oil, mentions the 
possible introduction of a customs tariff law and sales tax 
as well as improvements in tax administration.  (Comment: A 
customs-tariff bill, which will raise duties, has been stuck 
in the Finance Ministry for months.  It will be possible -- 
but optimistic -- to expect it to pass in 2009.  Even more 
optimistic is the expectation that a Customs Service that 
lacks experience and training and does not currently use a 
modern, internationally recognized valuation system -- and is 
widely held to be riddled with corruption -- will be able to 
implement any new law quickly enough to make an impact on 
2009 customs receipts.  End Comment.)  In practical terms, 
the major revenue generators for the state are expected to be 
transfers from state owned corporations * oil, banks, and 
telecommunications.  Such transfers would total USD 2.5 
billion.  The flat 5 percent 8reconstruction fee8 on 
imports is expected to increase to 10 percent "after the 
legislation to amend the fee" is passed to yield USD 431 
million in revenue, a 25 percent increase from 2008.  The 
Minister's message also notes the need to accelerate the use 
of grants from donor countries. 
 
Expenditures: Salaries and Security for Today, Investment 
Tomorrow 
--------------------------------------------- --- 
¶11. (SBU) Expenditures are programmed to total USD 59.5 
billion.  Operating costs in the proposed budget would 
account for 79 percent of total expenditures compared to 
70-75 percent in the 2007 and 2008 budgets. 
¶12. (SBU) Operational expenditures reflect recent salary 
increases, resulting in almost $21 billion, or 35 percent of 
total expenditures, dedicated to employee compensation and 
pensions.  The Minister's budget transmittal message warns 
that the government should avoid making public service a 
"subsidy or refuge for the accumulation of staff" which would 
turn the budget into an 8income redistribution plan.8  To 
avoid this, the Minister encourages investment programs 
driven by the private sector and labor training that meets 
the needs of the marketplace. 
¶13. (SBU) Security services, the proposed budgets of the 
Ministry of Defense and Ministry of Interior, would account 
for 18.5 percent of expenditures, a higher share than in the 
2007 (17.5 percent) and 2008 (17 percent) budgets.  The 
Minister's message notes that the 2009 budget will ensure 
adequate funding for the security services to reduce their 
reliance on MNF-I which, he noted, has been decreasing for 
Qreliance on MNF-I which, he noted, has been decreasing for 
several years. 
¶14. (SBU) Investment expenditures are projected to be USD 
12.1 billion in 2009 accounting for 21 percent of total 
expenditures as compared with 25-30 percent in the last two 
years.  In absolute terms the proposed budget would be 
slightly less than the base 2008 budget of USD 13.3 billion 
(without the supplemental), and a step up from 2007,s USD 
10.1 billion. 
¶15. (SBU) The Minister points out that "public investment 
programs are one of the most important tools of economic 
policy aimed at accelerating economic growth."  To combat the 
low implementation rate of capital spending the Minister 
suggests that the GOI (a) develop comprehensive indicators of 
investment projects; (b) undertake projects that have had 
feasibility studies completed; (c) complete projects on time; 
(d) emphasize the importance of local firms implementing the 
contracts; and (e) give priority to projects in the oil, 
electricity, public service areas. 
¶16. (SBU) Another major expense is the payment of 5 percent 
of oil revenues to the United Nations Claim Commission to 
settle claims in Kuwait.  The Minister's message points out 
that this cost is not within the control of the MOF but is 
8within the political framework.8 
 
BAGHDAD 00004077  003 OF 004 
 
 
 
PDS: Reducing the Items in the Basket? 
-------------------------------------- 
¶17. (SBU) Government support of the Public Distribution 
System (PDS) food basket (ration card), services such as 
electricity, water and sewage, and agricultural inputs are a 
&significant burden8 on the budget, according to the 
Minister's transmittal statement.  He suggests reducing 
support in 2009, noting, in particular, that it may be 
8appropriate to work on reducing some of the ration card 
items8 while still supporting materials such as flour, baby 
milk, rice and tea.  Nonetheless, the PDS has a proposed 
budget of USD 3.6 billion, which is slightly higher than the 
original 2008 budget request of USD 3.3 billion, but 
significantly lower than the budgeted  2008 PDS outlay of USD 
$5.8 billion, which includes the 2008 supplemental. 
(Comment: PDS officials add, separately, that lower worldwide 
food commodity prices will not fully offset the significant 
projected reduction to their 2009 budget.  We predict that 
any GOI decision to implement sharp cuts to the PDS ration -- 
for the first time in decades -- during an election year will 
face significant opposition.  End Comment.) 
Provincial Allocations: Lower 
----------------------------- 
¶18. (SBU) Allocations to the provinces other than the KRG are 
programmed to be USD 2.2 billion for development and 
reconstruction.  This is a significant decline from the USD 
3.3 billion contained in the base 2008 budget. MOF officials 
confirm that they will retain using 17 percent as the KRG,s 
share of the budget pending results of the national census 
that they expect to be completed in August 2009. 
Deficit: To Be Funded, Somehow 
------------------------------ 
¶19. (SBU) The projected deficit of USD 17 billion is 
substantially greater than that of previous years.  The 
Minister's message does not mention how the deficit will be 
financed. 
COMMENT 
------- 
¶20. (SBU) Some observations about the new proposed budget are 
warranted: 
-- Somewhat More Realistic: Comparing the current revised 
proposed budget to the initial budget of September is 
unwarranted.  The initial proposal was based on sustained 
high oil prices and, therefore, was never realistic.  Thus, 
no one has lost in the revision process because there was 
never the money to match their aspirations.  The new budget 
is more realistic, although projected revenues remain 
optimistic given current oil prices and declining export 
levels. 
-- In Line: Broadly speaking, the new proposed budget is 
roughly in line with moderate growth from previous year's 
budgets (disregarding the 2008 supplemental that was based on 
extraordinarily high oil prices); spending would steadily 
rise from USD 41 billion (2007) to USD 51 billion (2008) to 
USD 59.5 billion (2009). 
-- Economic Performance: One rationale for keeping spending 
high by running a deficit is to keep Iraq's economic growth 
on track.  The GOI accounts for half of domestic consumption 
and the bulk of domestic investment.  There is a fairly broad 
GOI consensus -- with the notable exception of CBI Governor 
Sinan Shabibi -- that the GOI should not be overly concerned 
at the inflationary portent of high GOI spending that is 
funded, if need be, by drawing down reserves. 
-- Deficit:   Whether the 2009 deficit will actually be USD 
17 billion will  depend not only on oil prices and exports, 
but also whether the GOI fully executes their entire 2009 
budget.  Financing of the deficit will rely on GOI own 
resources in the Development Fund of Iraq, MOF balances with 
Qresources in the Development Fund of Iraq, MOF balances with 
the Central Bank of Iraq, and MOF balances in the banking 
system that remain unspent after the 2008 budget closes. 
-- Focus: A tighter budget could help focus GOI attention on 
increasing efficiencies and drawing upon external resources, 
such as direct foreign investment, to achieve some of their 
development and reconstruction goals. 
-- Execution: We note that the projected investment budget 
for both the Iraqi central government and the provinces is 
about what they were able to spend in 2008.  Greater 
effectiveness from the end products of this capital spending, 
rather than simply pushing more money through the system 
(a.k.a. execution) will be a key goal, as Jabr noted.  We 
will still need to press the Iraqis for speedier in addition 
to better capital budget execution as this relatively austere 
budget was presented to the COR so late in the budget cycle. 
The COR will have to accept difficult compromises, which are 
certain to stimulate contentious debates before a final 
budget is passed. 
BUDGET FIGURES (in M/USD): 
--------------------------------------------- ------- 
                  2007   2008   2008/supp   2009 
 
BAGHDAD 00004077  004 OF 004 
 
 
Total Revenues        35.7   43.0    $70.1      $42.5 
Oil                 33.1   36.0     0.1       36.5 
Other               2.6    7.0     7.0        6.0 
Oil Exports(mbpd)    1.7     1.9     1.9       2.0 
Price /barrel (USD)  50     62       91        50 
--------------------------------------------- ------ 
Total Expenditures  41.1   50.7    72.2      59.5 
Operating           31.0   37.5    51.1      47.3 
Capital             10.1   13.3    21.1      12.2 
Operating 
Min. of Defense     4.1    4.8     4.9       4.6 
Min. of Interior     3.1    3.8    5.2       5.4 
Capital 
Min. of Oil       2.4    2.0    2.3       2.2 
Min. of Electricity  1.4    1.3    2.3       1.1 
Other Mins and KRG       4.2    6.7   10.1       6.3 
Non-KRG Provinces    2.1    3.3    6.4       2.6 
CROCKER